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BL: China's real estate bubble causing growing concern

By Michael Forsythe and Kevin Hamlin
BLOOMBERG NEWS
Published: 7:57 p.m. Saturday, Feb. 13, 2010

Jack Rodman, who has made a career of selling soured property loans from Los Angeles to Tokyo, sees a crash looming in China. He keeps a slide show on his computer of empty office buildings in Beijing. The tally: 55, with another dozen candidates.

"I took these pictures to try to impress upon these people the massive amount of oversupply," said Rodman, president of Global Distressed Solutions, which advises private equity and hedge funds on Chinese property and banking. Rodman estimates about half of the city's commercial space is vacant.

Beijing's office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc. Those figures don't include several buildings about to open, such as the city's tallest, the 74-story China World Tower 3.

Empty buildings are sprouting across China as companies with access to last year's $1.4 trillion in new loans build skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos say the country's property market is in a bubble.

"There's a monumental property bubble and fixed-asset investment bubble that China has under way right now," Chanos said. "Deflating that gently will be difficult, at best."

Investor concerns have spread beyond real estate. Among 15 major Asian markets, the benchmark Shanghai Composite Index is valued third highest relative to estimates for this year's earnings, after Japan and India.

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A glut of factories in China is "wreaking far-reaching damage on the global economy," stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said in November.

Digesting the debt from a popped property bubble could slash bank lending and drag growth lower for years in an economy that will account for more than a third of world growth in 2010, according to Tokyo-based research and analysis firm Nomura Holdings Inc.

The risks are so great that a decade of little or no growth — as Japan experienced in the 1990s — can't be dismissed, said Patrick Chovanec, an associate professor in the School of Economics and Management at Beijing's Tsinghua University.

"You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land — not even desirable plots of land — in Beijing to astronomical rates," Chovanec said. "At the same time, you have 30 percent-plus vacancy rates and slumping rents in commercial property, so it's just a case of when you recognize the losses — or don't."

Policymakers are starting to rein in the loans that helped fuel the property boom. Banks should "strictly" follow real estate lending policies, the China Banking Regulatory Commission said last month. It called for banks to "reasonably control" lending growth.

The People's Bank of China last week ordered banks to set aside more deposits as reserves for the second time in a month to help cool expansion in lending.

A drop in the property market might be accompanied by a surge in nonperforming loans. The Shanghai office of the banking regulatory commission said this month that a 10 percent fall in property values would triple the ratio of delinquent mortgages there.

This year, shares of Hong Kong-listed Industrial & Commercial Bank of China have dropped 13 percent, China Construction Bank Corp. is down 11 percent, and Hong Kong's benchmark Hang Seng index has declined 7.3 percent.

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However, China has considerable firepower at its disposal to deal with a crisis.

The nation has the world's largest foreign exchange reserves, at $2.4 trillion, and government debt equaled a mere 20 percent of the country's gross domestic product last year, according to the International Monetary Fund. That compares with 85 percent in India and the U.S. and 219 percent in Japan.

CB Richard Ellis doesn't count empty office buildings bought by banks and insurance firms when calculating vacancy rates because some of the space is for the owners' use. The company said that vacancy rates are starting to fall and rents to rise for the best office buildings as China's economic growth lifts demand.

The country's GDP expanded 10.7 percent in the fourth quarter from a year before, a two-year high, after China's government introduced a $586 billion stimulus package.

"In many cases, when you look at these buildings and say, 'That's never going to be fully occupied,' somehow, 12 to 18 months later, the building is full," said Chris Brooke, CB Richard Ellis's Beijing-based president and CEO for Asia.

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Looking south from the building that houses the Beijing headquarters of Goldman Sachs Group Inc., UBS AG and JPMorgan Chase & Co., one of the structures in the foreground is a 17-story office tower at No. 9 Financial Street.

Empty.

Farther afield are the two 18-story towers of the Bank of Communications Co. complex. Dirt is gathering at the doors, and the lobby is now a bicycle parking lot.

The supply of office buildings is poised to grow further. Jones Lang LaSalle Inc., a Chicago-based real estate company, estimates that about 12.9 million square feet of office space in Beijing will come online this year, adding to the total stock of about 100 million square feet.

The city government is driving growth regardless of the market. Financial Street Holding Co., whose biggest shareholder is the local municipal district, plans to build nearly 11 million square feet of office space starting this year, said investor relations chief Lydia Wang.

Across town, the district government is seeking to double the size of the city's central business district, which currently has a vacancy rate of 35 percent.

For its part, Beijing-based Financial Street Holdings has 100 percent of its properties rented out, Wang said. The empty buildings along Finance Street don't belong to the company, in which the district government owns a 26.6 percent stake.

Zhong Rongming, deputy general manager of the China World Trade Center Co., which built China World Tower 3, said the company is "optimistic about 2010 prospects" given China's accelerating growth.

One new addition to Finance Street may give real estate boosters cause for concern. No. 8 Finance Street will be the headquarters for China Huarong Asset Management Corp.

The company's mission: selling bad debt from banks.

Find this article at:
http://www.statesman.com/business/china-s-real-estate-bubble-causing-growing-concern-236655.html